The recent announcement of the closure of the Krups plant in Limerick with the loss of 500 jobs has fuelled the fear that Ireland may be heading for a severe slowdown.

The global financial turmoil and the belief that Ireland has had it too good for too long has proved to be an irresistible combination for the prophets of doom among us. One analyst recently predicted the economy would crash within two years.

Is Ireland heading for disaster? Given the openness of the Irish economy, only the foolish would argue that it will be unaffected by the recent global turmoil. Ireland is a most "un-island" of island economies: it exports about 80 per cent of what it produces and imports about 65 per cent of what it consumes and is, therefore, highly dependent on the world around it.

If the global economy collapsed into another Great Depression - possibly caused by contagion effects spreading out from the Far East and Russia - Ireland couldn't expect to remain an oasis amid such mayhem. However, the likelihood of this is much less than the media has led us to believe.

The current situation is serious, but a brief look at history suggests we are unlikely to witness a 1930s-style global recession. Moreover, a look at the type of jobs that have been lost in Krups (and Seagate and AST before that) suggests that they are the unfortunate by-product of Ireland's success rather than a leading indicator of a looming recession.

The Great Depression resulted from a lethal combination of unlucky circumstances and very bad policies. Anybody can suffer from bad luck - in economics, lightning can strike twice - but we have learned enough since the 1930s not to repeat the same mistakes.

There are two key points to note about the Great Depression: firstly, if the US Federal Reserve and other central banks had taken appropriate action over a period of more than five years, the problem could have been resolved. Secondly, the 1929 stock market crash was only one of a number of factors that contributed to the subsequent recession. Stock market crashes like the crash of 1929 are relatively frequent occurrences. However, that collapse occurred at a time when the US economy was already heading into recession. The Fed took no action at that point and also remained on the sidelines when the banking system collapsed in 1931.

The Fed did not react because the economic wisdom of the day argued that intervention was inappropriate and because it was restricted by the constraints of the Gold Standard. It was only through the advent of Keynesian economics in the late 1930s that the idea that markets can sometimes fail gained acceptance, and the policy of active intervention in such a scenario was subsequently embraced.

We are unlikely to see a repeat of the Great Depression for the simple reason that neither the US Fed nor the European central banks are going to stand idly by and watch their economies break down and their banking systems disintegrate.

Some economists might argue that central banks have not done enough to help the situation to date (and they might be right), but few would suppose that the central banks would do nothing if the situation deteriorated further. Ireland, for one, will benefit substantially from the cut in interest rates ahead of the introduction of the euro.

But this leaves the question of what caused the recent job losses. How can they be interpreted as anything other than as a result of the global downturn?

To see how, one has to realise that an economy cannot be competitive in all sectors, only in those in which it has a comparative advantage. Ireland's success in recent years in high-tech sectors, where an abundance of computer and/or science graduates are required, has pushed up wages in the economy as a whole. This has made it more difficult for Irish-based factories in lower-tech sectors to compete with companies in the Far East and elsewhere that benefit from the widespread availability low-paid but low-skilled workers.

Krups clearly thought that Ireland had a comparative advantage in its industry when it located in Limerick 34 years ago, but other countries now offer a more attractive cost structure in this sector. There is no doubt that the timing of the closure relates to global difficulties but it is very likely that it would have happened anyway.

This helps to explain why the IDA expects more job losses in the coming months. It is also why the goal of the Enterprise, Trade and Employment Minister Ms Harney's taskforce in this instance will be to re-skill the displaced employees for some of the 5,300 new jobs announced so far this year in the Limerick area instead of replacing Krups with a similar investor. Any economy undergoing a period of rapid growth, as Ireland is, will necessarily experience losses in some sectors that are offset by the gains in others.

It is simply not possible to be internationally competitive in all industries. Change is painful - not least for those who lose their jobs - but it does not imply that Ireland is heading for a crash.

Kevin Daly is European Economist with Credit Lyonnais Securities Europe.